George Osborne delivered the first Conservative Budget in almost 20 years and took decisive steps towards cutting a further £12bn from welfare spending.
This was positioned as a Budget for working people. It carried three main themes of higher wages, lower taxes and lower welfare spending.
The Government’s stance is clear: the best way out of poverty is through work. He delivered on the Conservative manifesto pledge of a higher inheritance tax threshold for family homes valued up to £1m, which will be funded by cutting the tax relief on pension contributions for higher earners.
This is our understanding of the main announcements as they relate to personal financial planning and, as always, the devil could well be in the detail which hasn’t actually been published yet.
At the moment most people can contribute up to £40,000 gross a year into a pension which is known as the Annual Allowance and is subject to having enough earnings of course. For those that have used ‘Flexible Access Drawdown’ you may have an allowance of £10,000, but don’t worry about that right now.
From April 2017 the Annual Allowance will be restricted if you have ‘adjusted income’ of more than £150,000 which of course means this isn’t relevant for the vast majority of people. If you are fortunate enough to enjoy income at that level the Annual Allowance will decrease by £1 for every £2 above £150,000. In practice therefore the allowance will be £10,000 for those earning £210,000 or above. It won’t fall below £10,000.
For those wondering what ‘adjusted income’ means it includes any employer pension contributions and means salary sacrifice cannot be used to avoid the restriction.
As a part of the changes above there were some rather complex new ‘Pension Input Period’ rules too which are outside of the scope of this document other than to say the position will be simplified, eventually. If you would like to know more please let us know.
For those in retirement who are ‘recycling income’, typically £3,600 gross per annum, this wasn’t mentioned and there seems no reason why this practice cannot continue. The Chancellor also reconfirmed the “triple lock” for State Pension benefits which guarantees the State Pension will always increase each year at the highest of earnings growth, inflation or 2.5%.
Finally a wide-ranging consultation has been announced to completely review tax relief on pensions and it seems likely that over time pensions and ISAs will merge into one ‘product’
Insurance Premium Tax
Whilst technically not really a financial planning related change we felt this announcement was worthy of a mention. With effect from 1st November 2015 the tax will increase by 3.5% to 9.5% and this seems to be a good example of a stealth tax that most people do not realise they are paying.
The individual nil rate band remains unchanged at £325,000 but, with effect from April 2017, a new annual allowance will be available to use against the family home providing it is passed on to a child or grandchild.
From 2020/21 this means that each individual could pass £500,000 to their family members tax-free and, as you would expect, the allowance will be transferable to the surviving spouse or civil partner on the first death meaning up to £1m will be sheltered from inheritance tax.
The new allowance will not be available to all however. The allowance will taper away for those estates worth £2 million and will be reduced to zero for estates worth £2.35 million or more in 2020/21.
Interestingly the allowance will still be available where a person downsizes on or after 8th July 2015 and assets of an equivalent value as the allowance in force at the date of death are passed to direct descendants.
In 2016/17 the ‘nil rate band’ will be £11,000, up from £10,600, and the higher rate threshold will be £43,000.
The Chancellor restated his aim to increase the thresholds to £12,500 and £50,000 respectively by the end of the current Parliament.
The ‘personal allowance trap’ still applies for those people with earnings in excess of £100,000 whereby for every £2 earned the allowance decreases by £1. Therefore those earning £121,200 in the current tax year do not enjoy any tax-free income at all and anyone in caught in that band is paying a draconian level of tax on anything above £100,000.
Please note the definition of earnings in this context is a little complicated and we’d be happy to explain further.
Dividend Tax Reform & Corporation Tax
This was another significant change. From April 2016 the tax credit of 10% of the gross dividend will be removed and all taxpayers will be entitled to a new tax-free dividend allowance of £5,000.
Therefore, for most people with a modest level of dividend income generated through shares held or a non-ISA investment portfolio, there probably will not be any more tax to pay. However, if dividends exceed the allowance a basic rate of tax of 7.5% will be payable increasing to 32.5% and 38.1% for higher and additional rate taxpayers respectively.
This change will be significant for people running their own business and drawing most of the income via dividends rather than PAYE.
Corporation tax rates will be decreasing to 19% from April 2017 and to 18% from April 2020, partly offsetting the increased tax noted above for people running their own small business.
The taxation of dividends in pensions and ISAs remains unchanged and will not incur a tax liability.
Buy to Let Changes
Historically mortgage interest payments on buy to let properties have been deductible when calculating rental profits. The profits are then taxed at the individual’s marginal rate meaning that mortgage interest payments can receive tax relief of up to 45%.
Between April 2017 and April 2020 this tax relief will be phased out until it is only available at the basic rate of 20%.
Furthermore the wear and tear allowance covering maintenance will be removed from April 2016 and replaced with allowable deductions for actual expenditure incurred.
In the Spring of 2014 the Chancellor surprised everybody by introducing ‘pension freedom’ which was, to say the least, a dramatic change that was implemented at a breath taking pace.
This budget may not have had one single headline with the impact of pension freedom but it is perhaps the most wide-ranging set of reforms that has been announced in a very long time.
It is this background of ever-changing legislation that makes us believe professional advice is absolutely vital when planning your long-term finances. We’re here to help you and, as always, if you would like any further information please let us know.